CARPE DIEM

Professor Mark J. Perry's Blog for Economics and Finance

Monday, May 21, 2007

Quote of the Day and Species Inflation

“No science in the world is more elevated, more necessary and more useful than economics.” ~Carl Linnaeus, a Swedish naturalist, born three centuries ago this week, who is better remembered for devising the system used to this day to classify living organisms.The Economist mentions Carl Linnaeus in an article about the recent "species inflation." For example, there are twice as many primate species (monkey, ape and lemur) today compared to the 1960s, not because any new discoveries, but because a lot of established subspecies have been reclassified as species, especially in the limited group of big, showy animals that the public, as opposed to the experts, care about. Why the species inflation?1. A species becoming extinct is easy to grasp, and thus easy to make laws about. Subspecies just do not carry as much political clout. 2. Upgrading subspecies into species simultaneously increases the number of rare species (by fragmenting populations) and augments the biodiversity of a piece of habitat and thus its claim for protection. Read more about species inflation here.

Abortion Laws Worldwide

From The Economist: More than 60% of the world's 6.5 billion people now live in countries where abortion is generally allowed, and a quarter where it is banned, according to the Center for Reproductive Rights. Mexico city has just decriminalized it, whereas in some countries, such as America and Poland, laws are becoming more restrictive. Some 46m abortions are thought to be carried out annually (more than one in three pregnancies is terminated). Of these, 20m are illegal, resulting in the deaths of some 70,000 women, according to the World Health Organization.

I had email questions from several professors about sources for my claim of “no pay gap after controlling for all of the factors that affect earnings." One of my sources is a 2005 NBER working paper "What Do Wage Differentials Tell Us about Labor Market Discrimination?" by June O'Neill (Professor of economics at Baruch College CUNY, and former Director of the Congressional Budget Office), who conducts an empirical investigation using census data, and she concludes:

"There is no gender gap in wages among men and women with similar family roles. Comparing the wage gap between women and men ages 35-43 who have never married and never had a child, we find a small observed gap in favor of women, which becomes insignificant after accounting for differences in skills and job and workplace characteristics.

This observation is an important one because it suggests that the factors underlying the gender gap in pay primarily reflect choices made by men and women given their different societal roles, rather than labor market discrimination against women due to their sex."

Oil Economics

We begin the economics lesson by stating that the oil industry owes no motorist a gallon of gasoline at any price. It doesn't have to provide a single drop. In Pennsylvania, the combined federal and state gasoline tax per gallon is about 50 cents. The government can, if it wishes, abolish gasoline taxes in order to help the consumer, especially the poor.Likewise, government officials and environmentalists can lift their resistance to building new petroleum refineries and can drop objections to drilling in the Arctic and off shore.

Quote of the Day: Price Controls in Venezuela

Free prices are to an economy what microchips are to a computer. They carry information. As Austrian economist Ludwig von Mises explained in his legendary treatise 60 years ago, it is free prices that ensure that supply will meet demand. When Mr. Chávez imposed price controls in Venezuela, he destroyed the price mechanism.

As predicted by simple economics, Venezuela now has serious and chronic shortages as a direct result of the Chávez price controls.

The reason is simple: Producers have no incentive to bring goods to market if they are forced to sell them at unprofitable prices. Ranchers hold back their animals from slaughter, fisherman don't cast their nets, food processors don't invest in equipment and farmers don't plant. Those who do produce find it makes more sense to take their goods across the border to Colombia or to seek out unregulated (black) markets.

And so it is that the Venezuelan egg is now a delicacy, the chicken an endangered species, toilet paper a luxury and meat an extravagance. White cheese, milk, tuna, sardines, sugar, corn oil, sunflower oil, carbonated drinks, beans, flour and rice are also in short supply.

Bottom Line: If you took the microchip out of a computer, you would have a computer that didn't work. If you take market prices out of the economy, you have an economy that doesn't work. Exhibit A: Venezuela and Chavez economics.

Update: See today's Washington Times editorial about another reason the Venezuelan economy is failing and headed for more trouble: the redistribution of Venezuela's land from large farms to cooperatives as part of Chavez's usual Marxist rhetoric of social equality and class struggle.

Sunday, May 20, 2007

What If Every Child Had A Laptop?

From a story tonight on"60 Minutes:"Nicholas Negroponte, a professor at MIT, had a dream. In it every child on the planet had his own computer. In that way, he figured, children from the most impoverished places – from deserts and jungles and slums could become educated and part of the modern world. Poor kids would have new possibilities. So, two years ago he founded a non-profit organization called “One Laptop Per Child.” He recruited a cadre of geeks and viola! The hundred dollar laptop, designed specifically for poor children, was born. "One Laptops" are for sale in minimum lots of 250,000. Each costs $176, though Negroponte expects the price will go down to $100 within two years. It's designed for a child, so it looks like a toy – on purpose. But it’s a serious computer with many innovations. For instance, it’s the first laptop with a screen you can use outdoors, in full sunlight. You can draw on it...or compose music. They have two or three times better Wi-Fi range than a $3000 dollar laptop in the U.S., and the battery lasts up to 12 hours with heavy use. If the battery does run out and you live in a thatch hut in the middle of nowhere, you can charge it up with a crank… or a salad spinner. A minute or two of spinning and you get 10 or 20 minutes of reading. And they're completely waterproof and sandproof. The families love the computers because in villages with no electricity, they are the brightest light source in the house.

Why Do You Think It's Called "Pork"?

Every half a decade or so, Congress considers what to do with a massive system of federal handouts that enriches a narrow band of American businessmen. Too often, after a fair amount of acrimony and spectacular displays of local-interest, pork-barrel politics, the system is altered -- sometimes for the good, sometimes not -- but not reformed as dramatically as it ought to be. The issue, of course, is American farm subsidies, an inefficient, trade-distorting program of price and income support included in the expiring farm bill; a new one is being prepared.From today's Washington Post staff editorial.

Limited Refinery Capacity = High Gas Prices

There hasn’t been a new refinery built in the U.S. since 1976, the result of extremely tight environmental restrictions, not-in-my-back-yard community opposition, and the high cost of new construction. Used refineries currently sell for about 30 to 50 percent of the cost of building a new one, so it’s cheaper to buy an old refinery and upgrade it. Or squeeze a little more gasoline out of the refineries you already own.

Saturday, May 19, 2007

Colombia's Stock Market and Economic Boom

From this week's cover story in Business Week, "Extreme Investing: Inside Colombia. An improbable journey from crime capital to investment hot spot. Can this boom last?"

"Entrepreneurial thinking here is spreading. Run a Google geographical-hit query, and you'll see that, per capita, nowhere in the world are there more searches for the words "Peter Drucker," the late management guru, than in Bogotá. No. 2? Medellín.

Yes, Medellín. Once the murder capital of the world, this city of 2.4 million is regaining its status as a commercial hub, hosting regional offices for a growing roster of multinationals including Philip Morris, Toyota, and Renault, as well as globally minded Colombian companies that make up 70% of the country's stock market value. More high-rises are under construction here than in Manhattan and Los Angeles combined."

As the graph above shows, Colombia's stock market is booming, generating returns of 32.81%, 50.22%, 45.07%, 86.22%, 118.91% and 17.32% in years 2001 through 2006!And what about all the crime that Colombia is so well known for? One sign of the rising fortunes in Colombia is the sudden misfortune of the self-proclaimed Bulletproof Tailor. Miguel Caballero makes suits and other apparel tough enough to withstand gunshots. His garment factory, located in a seedy neighborhood of Bogotá, features a picture gallery of famous customers, including action film star Steven Seagal and President Uribe, as well as glossies of Caballero discharging his handgun into the bulletproofed torsos of employees. Ten years ago, he says, his company sold 70% of its wares in Colombia. Now, thanks to the ebbing violence, that figure is just 20%. Caballero is dispatching salesmen to Russia, Venezuela, even Iraq. "The idea is to save the business," he says. "You can say we're globalizing."

"Unconscionably Excessive" Prices? Who Decides

House of Representatives' Federal Price Gouging Prevention Act:

"To protect consumers from price-gouging of gasoline and other fuels, it would be unlawful for any person to sell crude oil, gasoline, natural gas, or petroleum distillates at a price that: a) is unconscionably excessive; or b) indicates the seller is taking unfair advantage of unusual market conditions (whether real or perceived), or the circumstances of an emergency to increase prices unreasonably.”

First question and the biggest problem with legislation like this: What exactly is "unconscionably excessive," and who decides? When is a seller taking "unfair advantage" of a buyer, and who decides?

Maybe lawmakers ought to apply the same restrictions to other products. Some of us might find it “unconscionably excessive” that Starbucks charges the same amount for a 20-ounce cup of coffee that a consumer would pay at a supermarket for an entire can of coffee, one that will make dozens of cups. We might also find it “unconscionably excessive” that the same supermarket charges $1.25 for a bottle of the same water we can get direct from a tap for pennies. Talk about a markup.

McIndia, McDelivery, McVeggie

McDonald's currently operates about 50 restaurants in India, including 18 in Mumbai and 2 in Bangalore. What does it do differently there?

1. According to a CBS report (with video from Bangalore), "It's got the same old golden arches, the same efficient counter help slinging cheap eats, just the way they do everywhere from Poughkeepsie to Port Arthur. But in India, there's something missing at the world's fast food giant: hamburgers. That's right - McDonald's signature snack and its most recognizable symbol is nowhere to be found in one of the biggest countries on earth. According to Amit Jatia, a partner of McDonald's India, "It is the only country in the world that does not offer beef at all."

McDonald's has customized its menu to take advantage of the fact that India is the world's vegetarian paradise. Nearly all of the one billion people living here eat meat only occasionally, or not at all. McDonalds serves only veggie burgers and chicken burgers in India.

2. McDonald’s India is one of the few countries that provides home delivery service, available through a single access number for the entire country. McDelivery accounts for 5% of sales and is one of the fastest growing platforms, according to this report. Pizza delivery service has become so popular in India that McDonald's is trying to compete now with burger delivery. I wonder also if the horrible traffic conditions in large cities in India also make home delivery of burgers more attractive there than in the U.S. and Europe?

Google: Free Food, Massages, and Volleyball

Does your company encourage you to work on your own projects? Bring your pet to work, or simply go off and play beach volleyball? If yes, then you are probably working for Google.

Working for Google at its headquarters, Googleplex, is like being back at college. That may seem wacky but according to Fortune magazine, this is what made Google the best company to work for in the US. A visit to Googleplex in Mountain View, California, shows why.

There are a lot of perks for the staff: a well-equipped gym, on site massages and medical care. Transport, ranging from company provided scooters and pushbikes, to a massive fleet of shuttle buses. And there is free food. It's all part of a plan to attract the best and the brightest.

That explains why Google gets 3,000 job applications per day! Watch a video here about working at Google.

Friday, May 18, 2007

Quit Your Whining, It Could Be a LOT Worse

The graph above (click to enlarge) shows GDP growth over the last 2,000 years from year 0 to 1998 (Source: "The World Economy," by Angus Maddison, OECD). Notice that sustained growth in output of even 1% per year was not a reality until the 19th century, and sustained economic growth of 2-3% was not a reality until the last 50 years. A growth rate of just 3% means that output doubles every 24 years, which now happens at least 3 times during an average person's lifetime, which means we now actually experience significant increases in standard of living in a single lifetime. Compare that to the pre-1800 period when economic growth was basically non-existent, which means that the standard of living for the average person was not much different in the 18th century compared to the standard of living in the 1st century. Or another way to think about it is that we can get more economic growth in a single year today (3%) than they used to get in a thousand years.We might complain about income inequality and pay gaps, but those should be looked at as relatively minor complaints of a dynamic advanced economy growing an historically unprecedented rate of 3% - it could be a lot worse, it could be 507, 1207 or 1507 instead of 2007.

Actual Fan Mail Received in Today's Mail

Mr. Perry:Based on your most recent column in the Flint Journal, regarding lower wages for women versus those paid to males, I believe we can now add MISOGYNY to the long list of character flaws for Mark Perry. It is ironic that your column was published shortly after a column by Ellen Goodman appeared in Flint Journal, concerning the same issue. It appears that Goodman, a Pulitzer Prize winner, and an eloquent writer, was able to address this issue without resorting to the shrill rhetoric indigenous to your writing. Like most business majors, your writing skills are barely adequate, reflecting a "knee-jerk" conservatism, and, even worse, a mediocre intellect.M. WilsonFlint, Michigan

Mind the Pay Gap: It's Not There

Last month's "Behind the Pay Gap" report from the American Association of University Women once again highlighted a purported disparity between salaries earned by men and women. One year after graduation, women appear to be paid only 80% of what men are paid, the report found. After 10 years, their pay dropped to 69%. That would be terrible - if true. Instead, the much ballyhooed gender pay gap is a false premise, and it risks distracting Iowa and the nation from focusing on innovative ways to lead and develop the work force in changing times. The truth is that women choose professional careers that pay less in the entry-level marketplace. That is a career choice, not a pay gap.From the commentary "Gender Pay Differences: Mind the Gap; It's not There," in the Des Moines Register.

ADM Loves Ethanol, The "State Religion"

From The Straight Dope blog: The immediate beneficiaries of ethanol subsidies have been corn farmers and, more significantly, the Archer Daniels Midland Corporation of Decatur, Illinois, better known as ADM. The world's largest grain processor, ADM produces 40% of the ethanol used to make gasohol. As might be supposed, the company and its officers have been eloquent in their defense of ethanol and generous in contributing to both political parties. The politicians have been generous right back. The libertarian Cato Institute estimates that every dollar of ADM's ethanol profit costs taxpayers 30 bucks.

MP: ADM's embrace of ethanol has paid off hanbsomely, see the chart above of ADM's stock price vs. the S&P500. Over the last 5 years, the S&P 500 stocks have increased by about 48%, while ADM's share price has increased by more than 150%.

Converting World's Bread Basket into US Fuel Tank

From an editorial in today's WSJ, "Ethanol's Bitter Taste:"It was a scant two years ago that Georgia's Saxby Chambliss voted with 73 other giddy senators for an energy bill that required the nation to use 7.5 billion gallons of ethanol. Georgia's farmers loved corn-based ethanol; Georgia's agri-businesses loved corn-based ethanol; and all that meant that then-Agriculture Committee Chairman Chambliss loved corn-based ethanol, too.

Earlier this year, Mr. Chambliss introduced a bill calling for even greater ethanol use, though with one striking difference: The bill caps the amount of that fuel that can come from corn. Turns out Georgia's chicken farmers hate corn-based ethanol; Georgia's pork producers hate corn-based ethanol; Georgia's dairy industry hates corn-based ethanol; Georgia's food producers hate corn-based ethanol; Georgia's hunters hate corn-based ethanol. And all that means Mr. Chambliss has had to find a new biofuels religion.The government's decision to play energy market God and forcibly divert huge amounts of corn stocks into ethanol has played havoc with key sectors of the economy. Corn prices have nearly doubled, which means livestock owners can't afford to feed their animals, and food and drink manufacturers are struggling to buy corn and corn syrup. Environmentalists are sour over new stresses on farmland; international aid groups are moaning that the U.S. is cutting back its charitable food giving, and many of these folks are taking out their anger on Congress.Related: Increased corn prices driven by rapidly expanding U.S. ethanol production have already increased U.S. retail food prices by $14 billion annually, according to a new study released by Iowa State University. Further, the study finds that the increase in U.S. retail food prices could reach $20 billion annually....

Charts of the Day

What a difference a century or two makes! In 1820, China (33%) and India (16%) together produced about half of world GDP, which was more than double the size of Europe (24%), while the U.S. economy was less than 2% of world GDP. To put that in perspective, the economy of Mexico in 1998 was 1.9% of world output and Spain was 1.7%, so the relative size of the U.S. economy in 1820 was comparable to Mexico or Spain today.

By 1950, the U.S. produced 27.3% of world output, and China and India together produced less than 9%. Today, China and India combined account for more than 20% of world GDP (adjusted for purcahsing power, according to IMF and World Bank data).

Thursday, May 17, 2007

Hotel Discrimination? Rate Gap?

GRAND RAPIDS (AP) — The entire 19th floor and a lounge at a JW Marriott hotel set to open in September will be reserved exclusively for female clientele. "A lot of women are saying they're not feeling like they're safe when they're traveling to a strange city," a spokesperson told The Grand Rapids Press.

Access to those rooms will come at a $25- to $30-per-night premium over the standard rate of about $229. Wait a mintue, is that really legal? Not just the part about discrimination against men from staying on the 19th floor, but the part about about discrimination against women for having to pay more than men for basically the same room? Isn't this evidence of a "rate gap" because men are paying only 88% of what women pay?

A spokesman for the Michigan Civil Rights Commission said he was uncertain about the legality of a hotel offering a women-only floor.

Income Inequality = Education Inequality

The most commonly cited culprits for the income inequality in America — outsourcing, immigration and the gains of the super-rich — are diversions from the main issue. Instead, the problem is largely one of (a lack of) education.

For the economy as a whole, labor’s share of national income has stayed roughly constant at just above 70%. What has changed is that highly skilled laborers earn more labor income than low-skilled workers.

College graduates have been gaining relative to high school graduates.

What's So Great About Energy Self-Sufficiency?

Energy self-suffi­ciency is the idea of the U.S. supplying all, or nearly all, of its own energy needs. The public reacts enthusiastically to the idea in polls, which is why every president since Richard Nixon has announced energy indepen­dence as a distant goal.

We seldom hear self-sufficiency lauded in connection with other essential goods, like automobiles, airplanes, food, or medicines. The U.S. currently imports about one-fourth of its timber—required for building homes and printing newspapers, books, and magazines. But we don’t hear calls for “ending our dependence on for­eign timber.”

Losses Are Obscene, NOT Profits

"Profits are never obscene. Losses, on the other hand, can be obscene – disastrous, damaging, deadly to employees, stockholders and, ultimately, the public.

Auto companies have suffered major losses --- obscene losses, if you will – so does that make them more virtuous than oil companies?

Profit isn’t a shameful accident for corporations --- it’s their very reason for being. Big profits help them do more of what they did to make the profit in the first place. In the case of oil companies, that means more exploration, development, drilling, pumping, refining, transporting and marketing of the oil that fuels every aspect of our economy. Their profitability indicates that they’ve done an excellent job of doing what the public needs and wants, just as the losses by American auto makers suggest that they’ve done a terrible job at giving the public cars we want to buy."

Higher Taxes = Higher Prices

"Of course, it’s frustrating to pay more at the pump, but oil profits aren’t the culprit, nor would punishment of the energy companies help to bring down the cost of fuel. When businesses pay a heavier burden in taxes, it doesn’t make prices go down; it generally forces prices to go up, whenever companies can pass on the cost to the consumer (see chart above).

The idea that “windfall profit taxes” would cause oil companies to charge less flies against every rule of economic reality. If you add to the cost of production with new levels of governmental taxation or regulation it means that either prices go up or else profits go down – meaning less incentive for production, less production and, inevitably, higher prices (see chart above)."

Government "Price Gouging" At The Pump

"Speaker Pelosi is "particularly concerned" that the highest price of gasoline recently was in her San Francisco district — $3.49. So she endorses HR 1252 to protect consumers from "price gouging," defined, not altogether helpfully, by a blizzard of adjectives and adverbs. Gouging occurs when gasoline prices are "unconscionably" excessive, or sellers raise prices "unreasonably" by taking "unfair" advantage of "unusual" market conditions, or when the price charged represents a "gross" disparity from the price of crude oil, or when the amount charged "grossly" exceeds the price at which gasoline is obtainable in the same area. The bill does not explain how a gouger can gouge when his product is obtainable more cheaply nearby. Actually, Pelosi's constituents are being gouged by people like Pelosi — by government. While oil companies make about 13 cents on a gallon of gasoline, the federal government makes 18.4 cents (the federal tax) and California's various governments make 40.2 cents (the nation's third-highest gasoline tax). Pelosi's San Francisco collects a local sales tax of 8.5 percent — higher than the state's average for local sales taxes.

Pelosi and others just know, evidently intuitively, what the "fair" price of gasoline is."

Quote of the Day

"On an ordinary day in New York City, Eleanor goes to her favorite specialty store to pick up a jar of pickled herring. She fully expects the herring to be there. Indeed, New Yorkers of all kinds consume vast stocks of foods of all kinds, with hardly a worry about continued supply.... What enables cities to retain their coherence despite continual disruptions and a lack of central planning?From the point of view of physics, it is a miracle that 8 million New Yorkers are fed each day without any control mechanism other than sheer capitalism." ~John H. Holland of the University of Michigan's Center for the Study of Complex Systems, and Professor of Psychology, and Profesosr of Electrical Engineering and Computer Science, from his book "Hidden Order: How Adaptation Builds Complexity"This relates to my posting below about complexity, central planning, and the fatal conceit. In general, I think people in the general population systematically:a) Underestimate the complexity of a market economy,b) Underestimate and underapreciate the ability of a market economy to evolve and "self-organize" according to "spontaneous order" (they don't see the "hidden order"), and c) Therefore overestimate the ability of central planners, politicians, zoning boards and bureaucrats to organize, plan and regulate the economy with a "top down" approach. Result: We end up with more government regulation and legislation than is optimal for an infinitely complex, evolving, ever-changing economic system that has an amazing ability to "self-correct" and "self-adjust." My experience has been that the one group outside of the economics profession that appreciates the market economy are computer scientists, like Professor Holland, a pioneer in complex systems and the recipient of the first computer science Ph.D. from the University of Michigan.

Wednesday, May 16, 2007

Addicted in Europe

From The Economist: The Greeks puffed away more than any other nation, smoking over 3,000 cigarettes per head of population in 2006, according to ERC, a market-research group. It compares annual consumption in 120 countries, which together account for over 95% of global consumption. Spain, another Mediterranean country, also smokes heavily, but it is the traditionally poorer eastern European countries that dominate the top 15. Rich Japan is the lone non-European nation.Although the U.S. is not listed in the graph above, according to this report per capita cigarette consumption in the U.S. was 61.1 packs in 2006, or 1,222 cigarettes per person. In that case, the U.S. would be way below the lowest ranked country above (Poland).

Math Fact of the Day and The Fatal Conceit

Q: If you shuffle a deck of 52 cards, what do you think the chances are that the resulting arrangement of cards has happened sometime before in history?A: As hard as it seems to imagine, the answer is almost zero. If you thoroughly shuffle a deck of 52 cards, chances are practically 100% that the resulting arrangement of cards has never before existed at any time in history!Mathematically, the number of different ways to arrange any 52 items is 8.07 X 1067, which is a number so enormous (8 with 67 zeros after it) that no human can comprehend it. By way of comparison, the number of ways to arrange a mere 20 items is 2,432,902,008,176,640,000 (2.43 x 1018)-- a number larger than the number of seconds that elapse in the course of 10 billion years. And this number for 20 items is microscopic compared to 8.07 X 1067 (for 52 items).

The information above is from George Mason economist Don Boudreaux's most recent column, who uses the math facts above to argue that "central planning won't ever work, because no human mind, or group of minds, (no matter how intelligent) can even list -- much less rank -- the gigantagazillion different possible arrangements of resources."

Like Sowell points out below, there are thousands of pieces of information about tastes, preferences, production, prices, costs, resources, inputs, etc. dispersed throughout the economy, and there an infinitely large number of combinations and arrangements possible to organize production to satisfy the ever-changing demands of consumers. Central planning can never work effectively because the central planners are powerless and helpless - they will never have access to enough information to organize a complex economic system efficiently. Hayek called this the "fatal conceit" - the disastrous, often fatal consequences that result from conceited central planners' attempts to organize an economy that cannot be controlled from the top down.

Quote of the Day

If you start from a belief that the most knowledgeable person on earth does not have even 1% of the total knowledge on earth, that shoots down social engineering, economic central planning, and judicial activism.

If no one has even 1% of the knowledge currently available, not counting the vast amounts of knowledge yet to be discovered, the imposition from the top of the notions favored by elites convinced of their own superior knowledge and virtue is a formula for disaster. Central planning, judicial activism, and the nanny state all presume vastly more knowledge than any elite have ever possessed.

Tuesday, May 15, 2007

Why $5 Gas Is Good for America

Rising oil prices are more than just an irritant or even an ominous nick out of the GDP. For anyone with a fresh idea, expensive oil is as good as a subsidy - with no political strings attached. Indeed, every extra penny you pay at the pump is an incentive for some aspiring energy mogul to find another fuel.For the better part of a century, cheap oil has fatally undercut all comers, not to mention smothered high-minded campaigns for conservation, increased efficiency, and energy independence. But growing demand is outrunning the oil industry's carefully computed supply curves, bidding up long-term expectations for the price of energy. The long term may not mean a lot when you're standing at the pump, but the oil industry lives in a world where big projects take a decade to build and the checks that pay for them have eight or nine zeroes.

The changing outlook opens horizons - for conventional drilling, sure, but also for alternatives. Some new technologies merely produce more crude. But others tap energy supplies that have nothing to do with black pools under the Middle East. What to do? Keep driving. In fact, drive more. The longer gas stays expensive, the higher the chance we'll see alternatives. Put that pedal to the metal. And smile when you see a big black $3 or $4 out in front at the gas pump. Those innovators need all the encouragement they can get. Shale oil, uranium, sunlight - there's enough energy out there for a dozen planets. Where we'll all park is another matter.

First Law of Legislative Thermodynamics

From the front page of today's Washington Post, an article that illustrates the "tryanny of the political status quo" and the First Law of Legislative Thermodynamics: "Creating a government program is much, much easier than killing one." A Depression-era program to bring electricity to rural areas is using taxpayer money to provide billions of dollars in low-interest loans to build coal plants even as Congress seeks ways to limit greenhouse gas emissions.The beneficiaries of the government's largesse -- the nation's rural electric cooperatives -- plan to spend $35 billion to build conventional coal plants over the next 10 years, enough to offset all state and federal efforts to reduce U.S. greenhouse gas emissions over that time.The money comes from the Agriculture Department's Rural Utilities Service, an outgrowth of the Rural Electrification Administration created in 1935 by President Franklin D. Roosevelt to bring electricity to farms. More than 70 years later, the goal of providing electricity to rural areas has long been accomplished, but the federal government is still making the subsidized loans. But rather than declare the mission accomplished and disband the expensive subsidy program, Congress continued it and allowed it to become even more generous.Although presidents over the years have tried to curtail the rural-electricity lending program, it has survived, proving one of the basic laws of legislative thermodynamics: Creating a government program is easier than killing one.One possible solution: All government programs like this one should have "sunset" clauses that end the program automatically after a fixed period of time.

T-Shirt Economics

Economist Alan Blinder writes that "offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation."

The telling phrase is "political issue." "To be marketable in the political arena," Blinder once explained, "an idea must be short and snappy enough to be emblazoned on a T-shirt. But any economic idea expressed that tersely is almost certainly wrong."

"Offshoring" is short and snappy enough to attract nativist and protectionist interests, left and right.From Cato's Alan Reynolds' article "If Offshoring Is Net Job Loser, Where's Proof?" in today's IBD.

Quote of the Day

All sorts of people can have all sorts of beliefs about what tax rates are best from various points of view. But how can people work themselves into a lather over the fact that some taxpayers are able to keep more of the money they earned, instead of turning it over to politicians to dispense in ways calculated to get themselves re-elected? ~Thomas Sowell

Monday, May 14, 2007

Cartoon of the Week

Quote of the day: "Food prices increase because of government-sponsored ethanol—the magic fuel elixir... One quarter of the nation's corn production will be diverted from livestock feed to unenergetic ethanol this year. In March, corn increased to $3.20 from $2.00 a bushel last year. The cost of feeding chickens, our most popular meat, is up 40%. This expensive and poor substitute for energy-rich gasoline is heavily subsidized with our taxes (51 cents per gallon of ethanol), diverting resources by political decisions rather than through market efficiencies."

Consumer-Friendly, Market-Driven Health Care

It's Friday evening and you suspect that your child might have strep throat or a worsening ear infection. Do you bundle him up and wait half the night in an emergency room? Or do you suffer through the weekend and hope that you can get an appointment with your pediatrician on Monday -- taking time off your job to drive across town for another wait in the doctor's office?

Every parent has faced this dilemma. But now there are new options, courtesy of the competitive marketplace. You might instead be able to take a quick trip on Friday night to a RediClinic in the nearby Wal-Mart or a MinuteClinic at CVS, where you will be seen by a nurse practitioner within 15 minutes, most likely getting a prescription that you can have filled right there. Cost of the visit? Generally between $40 and $60.

These new retail health clinics are opening in big box stores and local pharmacies around the country to treat common maladies at prices lower than a typical doctor's visit and much lower than the emergency room. No appointment necessary. Open daytime, evenings and weekends. Most take insurance.

Much like the response to Hurricane Katrina, private companies are far ahead of the government in answering Americans' needs, this time for more accessible and more affordable health care. Political leaders across the country seeking to expand government's role in health care should take note.

Take note, Congress: The market is providing cheaper medicines, more affordable care -- and it is also helping the uninsured. A Harris Interactive poll conducted in March for The Wall Street Journal said that 22% of those visiting the clinics were uninsured. Wal-Mart says that half of its clinic visitors are uninsured.

The Crippling Burden of UAW Legacy Costs

Chrysler lost $600 million last year, and now private equity firm Cerberus will buy a majority of the struggling Chrysler Group for $7.4 billion, breaking up a transatlantic car union that never lived up to its billing as a marriage made in heaven.From today's WSJ: "The proposed deal would allow the German auto giant to shed Chrysler's $18 billion in retirement and health-care liabilities and could open the door to further restructuring of the nation's unionized auto makers.

A private-equity takeover of Chrysler would mark a watershed for the industry, which is struggling under the weight of massive pension and health-care obligations to its union workers. Those debts and the cash required to fund them have hobbled GM, Ford, and Chrysler in the face of relentless competition from Asian and European rivals."

The crippling UAW legacy cost problems are not unique to Chrysler, and they are going to get a lot worse in the future for all of the Big Three automakers.

In 2005, GM provided health and income benefits to more than 450,000 retirees and their surviving spouses, and retirees and their dependents outnumbered the company's active workforce by three-to-one. This imbalance will continue to grow as more and more retirees are supported by fewer and fewer workers, especially since a) nearly a third of GM's hourly workforce signed up for payout packages in 2006, resulting in even more retirees and fewer active workers, b) GM continues to lose market share (see graph above), and rising legacy costs get spread over fewer and fewer vehicles.

Bottom Line: The UAW is the most successful union in U.S. history, at achieving both higher-than-market wages and below-market productivity for its members, in the short run. But that very union success has now created the seeds of a powerful destruction that we are witnessing today, and in the long run the success of the UAW is destroying thousands and thousands, and maybe millions of union jobs, and is destroying many of the very companies that employs its members (GM, Ford and Chrysler). The UAW's golden era is over. Unless its leaders and members concede that it's been overtaken by economic reality and begin to act accordingly, both the UAW and Big Three will go the way of the dodo bird.

Sunday, May 13, 2007

Gains From Trade = $1 to $3 Trillion

In a research article "The Payoff to America from Globalization," three economists associated with the Institute for International Economics (and Northwestern University and Brigham Young) quantify and estimate: a) the payoff from opening the U.S. economy to international trade since WWII, and b) potential future gains from opening the economy to more trade going forward. They find that trade opening since World War II has added between $800 billion to $1.4 trillion to the U.S. economy, or about $7,000 to $13,000 per household. Estimates of the potential additional gains from removing the rest of U.S. trade barriers range from $400 billion to $1.3 trillion, or about $4,000 to $12,000 per household. Since trade opening permanently raises national income, these gains are enjoyed annually. Trade opening inevitably entails adjustment costs, and they estimate the lifetime cost of all worker dislocations that have been triggered by expanded trade in the United States could be as high as $54 billion, although probably less. The permanent gains from past and potential trade liberalization ($1.2 trillion to $2.7 trillion) easily swamp the modest sums necessary to alleviate the temporary pains of adjustment. In the future as in the past, free trade can significantly raise income – and quality of life – in America.(Via JohanNorberg.net.)

Using both international trade theory models and hundreds of empirical studies like the one above, there is overwhelming evidence that the benefits of free trade significantly outweigh the displacement and adjustments costs of trade, creating positive net economic benefits for countries that trade, and an increase in income, wealth, prosperity and the standard of living.

Upcoming Pay Gap Smackdown with Rep. Maloney

I wrote recently here about the problems with the AAUW's report on the "pay gap." Using the information in that blog posting, I wrote a 750-word commentary that appears in my local paper, the Flint Journal ("Graduates, Be Assured That Gender-pay-bias Claim Not Well-founded"). Next week, a 625-word version of my commentary will be distributed nationally as a Pro-Con "Pay Gap Smackdown" between me and Rep. Carolyn Maloney (D-NY), who is one of the leading drivers in Congress on the issue. Stay tuned to CD for specific placements in newspapers around the country on that one.

Saturday, May 12, 2007

Public Suffers From Anti-Market Bias

From today's WSJ, an excellent article by George Mason economist Bryan Caplan, who explains why special interest legislation is so popular even though it makes us worse off: "Behind every policy that does more harm than good, there's a special interest that favors it anyway. The steel tariff was bad for consumers, steel-using industries and foreign steel producers, but the steel lobby still pushed for it. Farm subsidies are bad for both taxpayers and unsubsidized farmers, but in 2002 the American farm lobby got a 70% increase in government support. The minimum wage is bad for consumers, employers and low-skill workers who get priced out of their jobs, but unions are hard at work to raise it again.

An yet "special-interest" legislation is popular and special interests so often get their way. They do not have to force their policies down the public's throat, or sneak them through Congress unnoticed. To succeed, special interests only need to persuade politicians to swim with the current of public opinion.

Why would the majority favor policies that hurt the majority? There is a good reason. The majority favors these policies because the average person underestimates the social benefits of the free market, especially for international and labor markets. In a phrase, the public suffers from anti-market bias."

Low Jobless Rates, Czechs Find Work in Montana

Billings, Montana and Logan, Utah, tied for first place as cities with the lowest unemployment rates in the nation, at just 2%, according to the BLS's report on metro area jobless rates for March. Billings is facing a labor shortage as demand for workers increases for summer employment, and employers are hiring workers from as far away as the Czech Repbulic!From today's Billings Gazette:Bonnie Ples, who manages the Red Lodge Pizza Co. says her restaurant is counting on Czech guest workers."Yeah, it's hard to find workers, so we are hiring eight Czech Republic workers for the summer," she said.Czech workers might also find employment opportunities in Australia, where the unemployment rate just fell to a 32-year low of 4.4%, according to the Australian Bureau of Statistics.

Michigan Public School Pyramid Scheme

In Michigan, it's not just the Big 3 automakers who are burdened with the rising legacy costs of providing pensions and lifetime health benefits to a rising number of retirees - Michigan public schools are facing the same financial crisis.

Michigan is the only state that makes its public schools bear the entire burden of retiree pensions and health care. This year's bill -- an estimated $1,015 per student -- is more than schools spend on books, buses, computer technology and building maintenance combined (see top graph above). And it's going to get worse.

The retirement assessment -- set by the state but paid by individual school districts -- is now at a record high of 17.74% of each district's payroll. That rate is expected to jump to 30% by 2020 -- a level that all sides agree would break the backs of Michigan schools (see bottom graph above).

In many ways, the financial straits of Michigan's public schools mirror the plight of the Big Three. Detroit's automakers and the schools both have offered generous retirement benefits to retirees for decades. As retirees live longer and health care bills rise, retirement costs have skyrocketed. Most organizations that offer retiree health care are dealing with rising bills.

Friday, May 11, 2007

Too Much Credit or Not Enough?

Years ago, there was concern that the poor didn't have enough access to credit, and were denied access to the American dream of homeownerhsip. Now there is concern that there is too much credit available. Easy access to the world's most efficient and well-developed mortgage markets helped increase homeownerships rates significantly over the last 40 years. In 1965, the homeownership rate was just less than 63% according to the Census Bureau. A few years ago in 2005, it hit an historical high of 69.1% partly due to subprime lending, and has fallen to 68.4% in 2007, due to recent foreclosures of marginal borrowers.

From Reason Magazine, "In a sane world, we’d say this is a market behaving as it should, and marvel at an economy where so many people who were once locked into the renters market have gotten a chance at homeownership. Some of them have blown their chance by exhibiting the same kind of behavior that made them bad credit risks in the first place. But most have not. In fact, about nine out of every 10 sub-prime borrowers are still making their payments." Is there too much credit or not enough? Like all important decisions, let's let the market decide through a trial-and-error discovery process what the optimal amount and distribution of credit should be. HT: Bill Hood

Let's Abolish the World Bank

George Will writes in his column this week that the World Bank faces much bigger problems than the situtation with Paul Wolfowitz and his girlfriend. In fact, Will says that the rationale for the World Bank was never strong, and has now evaporated, especially because of the waste and corruption of the political yet unaccountable distribution of many billions of World Bank dollars. What cures poverty is economic growth, and the prerequisite for growth is free markets allocating private capital to efficient uses, not the World Bank's intrusive government actions on behalf of fashionable causes. According to Will, "It is difficult to demonstrate that World Bank loans have produced growth, let alone as much growth as private capital would have produced."

Local News Reporting Outsourced to India

From today's LA Times, an article about outsourcing local news reporting to India, where you can apparently hire UC-Berkeley grads for $7,000 per year on Craigslist.When is local journalism not really local? When it's about Pasadena and written by someone in India.

James Macpherson, editor and publisher of the Pasadena Now website, hired two reporters last weekend to cover the Pasadena City Council. One lives in Mumbai and will be paid $12,000 a year. The other will work in Bangalore for $7,200.The council broadcasts its meetings on the Web. From nearly 9,000 miles away, the outsourced journalists plan to watch, then write their stories while their boss sleeps — India is 12.5 hours ahead of Pacific Standard Time."A lot of the routine stuff we do can be done by really talented people in another time zone at much lower wages," said Macpherson.On India's Craigslist, he posted an ad that said, "We do not believe that geographic distance between California and India will present unsurmountable problems, and that working together with you will result in your development of a keen working knowledge of this city's affairs."Dozens replied. One of the two chosen had attended the UC Berkeley Graduate School of Journalism. Rob Gunnison, the director of school affairs there, is dismayed. "It just seems so fundamental to journalism to be there," Gunnison said. "I still can't quite believe it's not a hoax."Here are a few current ads on Bangalore's Craigslist for writers, click here, and here, and here (this ad says that female writers are preferred?).

Thursday, May 10, 2007

Who's Preying on Whom?

Robert Samuelson in yesterday's Washington Post:"It is not "protectionist" (I am a long-standing free-trader) to complain about policies that are predatory; China's are just that."Let's see. China sells American consumers and businesses cheap goods, often subsidized by the citizens/taxpayers of China with export subsidies, at prices lower than we could produce those goods ourselves. They also invest about $200 billion each year in our economy buying our financial assets (stocks and bonds). Here's where I might agree with Samuelson: those results are "predatory," but "predatory" in the sense we are taking advantage of the Chinese, not that they are taking advantage of us. We take advantage of both their cheap goods and their capital investment in the U.S. economy. Q: What if the China agreed to send us all of their production for free as a gift of foreign aid, would Samuelson still complain about "predatory" trade practices?

Wednesday, May 09, 2007

Instant Translation: Babel Fish

The website "Babel Fish Translation" will instantly translate a block of text or an entire website from English into a dozen different languages including Russian and Chinese (see above), Korean, French, German, Portugese, Italian, Dutch, etc., and vice-versa.

The name of the websiteBabel Fish comes from a fictional species of fish in the book "The Hitchhiker's Guide to the Galaxy" that can instantly translate any language to any other language.

Government Orders Station to RAISE Gas Prices

Given all of the recent media coverage, I thought most people were worried about HIGH gas prices. Well, apparently not the state of Wisconsin, which is worried about LOW gas prices.

A service station in Wisconsin has been ordered by the state to RAISE its prices, see the story here.

According to the government, any price can be illegal. Too low, it's predatory pricing; too high, it's price gouging (or ticket scalping); too close to the price of your rivals, its collusion or price-fixing.

April Revenue Shower: What Tax Cut?

I wrote a few days ago about the surge in tax revenues. In today's WSJ, there is a related article titled April Revenue Shower, here are some excerpts:

Here's the "surge" you aren't reading about: the continuing flood of tax revenue into the federal Treasury. Tax receipts for April were $70 billion above the same month in 2006, and April 24 marked the single biggest day of tax collections in U.S. history, at $48.7 billion, according to the latest Treasury report.

There's no denying that Americans are sending more money than ever to Washington: Revenues for the first seven months of fiscal 2007 are up 11.3 percent or $153 billion (see chart above).

This Beltway bonanza has helped to slash the projected federal budget deficit by more than half from the same point last year. Across the past three Aprils, federal red ink has sunk by nearly $300 billion. The deficit this year could tumble to $150 billion, or an economically trivial 1% of GDP.

This revenue boom certainly casts doubt on the political wails about tax loopholes for the rich: So far this year, the taxes paid on so-called nonwithheld income, which are dollars that don't come from normal wages and salaries, have climbed by nearly 30%. This is income largely derived from capital gains, dividends and other investment sources - that is, the tax rates that were cut in 2003.

Individual income taxes are also up by 17.5% (see chart above) -- a handsome fiscal dividend from rising wages and low unemployment.